On Tuesday, May 13, 2014, the Colorado Supreme Court issued two decisions that provide a glimmer of hope for businesses waging the war with state government agencies over the classification of workers as independent contractors.
The cases are:
- Industrial Claim Appeals Office v. Softrock Geological Services, Inc. et al. (involving the classification of 1 geologist)
- Western Logistics, Inc. d/b/a Diligent Delivery Systems v. Industrial Claim Appeals Office et al. (involving the classification of 220 delivery drivers)
Both cases involve whether an individual is an “independent contractor” under the Colorado Employment Security Act, C.R.S. 8-70-115. Both cases arose as a result of audits conducted by the Colorado Division of Employment and Training (aka Division of Unemployment Insurance). And, both cases originally found the businesses to be liable for unemployment compensation premiums due. In other words, for the most part, the Division (the auditor, the Hearing Officer(s) and/or the Industrial Claim Appeals Office) found that the workers in question should be classified as employees, and therefore, the companies owed back taxes for unemployment insurance premiums, interest, and going forward contributions. The businesses appealed.
The Colorado Supreme Court Decisions
In two en banc decisions (meaning all judges sat for the decisions), the Colorado Supreme Court remanded to the Colorado Court of Appeals and/or returned Softrock and Western Logistics back to the Division for proceedings consistent with the Court’s holding that there is no dispositive single factor or set of factors to determine whether a worker is engaged in an independent trade or business under the Colorado Employment Security Act. Rather, the answer to the question of “independent trade” can only be resolved by applying a “totality of the circumstances” test that evaluates the particular set of circumstances and dynamics of the relationship between the worker and the company engaging the services.
The factors for evaluation include, but are not limited to, the 9 factors set forth in the statute:
[Whether the employer:]
- Require[s] the individual to work exclusively for the person for whom services are performed; except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document;
- Establish[es] a quality standard for the individual; except that [the employer] can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed;
- Pay[s] a salary or hourly rate but rather a fixed or contract rate;
- Terminate[s] the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract;
- Provide[s] more than minimal training for the individual;
- Provide[s] tools or benefits to the individual; except that materials and equipment may be supplied;
- Dictate[s] the time of performance; except that a completion schedule and a range of mutually agreeable work hours may be established;
- Pay[s] the individual personally but rather makes checks payable to the trade or business name of the individual; and
- Combine[s] [the employer’s] business operations in any way with the individual’s business, but instead maintains such operations as separate and distinct.
And, other factors, such as whether the worker:
- Maintains an independent business card, listing, address, or telephone;
- Has a financial investment such that there was a risk of suffering a loss on the project;
- Uses his or her own equipment on the project;
- Sets the price for performing the project;
- Employs others to complete the project; and
- Carries liability insurance.
And still, other factors, including a “wide array of factors” related to the parties’ actual relationship, rather than a “rigid check-box type inspection.”
The Division has relied for many years on a strict, 2-factor analysis to determine the classification or misclassification of a worker: (1) whether the worker is free from “control and direction” in the performance of his/her services; and (2) whether the worker is “customarily engaged in an independent trade, occupation, profession, or business related to the service performed.” The “control and direction” factor remains intact. However, the “independent trade” factor used to mean that the Division would find a misclassified employee in any situation where a worker did not perform the same type of services for others as an independent contractor during the period in question. Now (as aptly and reasonably pointed out by the Colorado Supreme Court), such reliance by the Division on a single-factor test for the “independent trade” element “unfairly subjects the employer to a hindsight review of whether the putative employee engaged in other work during the period in question and does not consider the myriad of reasons that an independent contractor might not engage in other employment despite being free to do so.”
What Does This Mean for Businesses Going Forward?
Although good news, these cases still emphasize that the evaluation of worker classification issues in Colorado remains complex. Employers should work with their legal counsel to analyze worker classifications, and if employees are improperly classified as independent contractors, any misclassifications should be remedied as soon as possible. Colorado is one of a handful of states that have signed on to partner with the United States Department of Labor to combat, what the government views, as businesses improperly misclassifying employees as independent contractors. Colorado also has passed its own law that authorizes the Division to conduct audits and investigations of complaints and to fine employers up to $5,000 per misclassified employee for the first misclassification with willful disregard and up to $25,000 per misclassified employee for subsequent misclassifications.
The clarified test under Colorado law is, thankfully, far less rigid than its past application and should be conducted going forward on a case-by-case basis applying a “wide array of [relevant] factors.” Future case law will likely provide further guidance on the applicability of the factors under different circumstances. For now, businesses in Colorado can breathe a collective sigh of relief that the Colorado Supreme Court has, at least, provided clarity (and a much needed voice of reason) on the proper analysis of independent contractors under the Colorado Employment Security Act.